How Does Delta Air Lines Win As United Continental Copies Its Policies?

In a constantly changing world of airline policies, it's important to remember that airlines are not just switching things up to agitate travelers. Each policy change centers on plans to create more profit, whether by growing revenues or cutting costs.

The latest type of change hitting the industry is a shake-up of traditional frequent flyer programs. When Delta Air Lines (NYSE: DAL) made the first move in February to redefine how miles are awarded, I noted that investors and travelers should watch to see if the policy change spreads to United Continental Holdings (NYSE: UAL) and American Airlines Group (NASDAQ: AAL) . Now that United Continental has joined the change, it's time to look at how this will affect the industry as a whole.

Time for changeUntil this year's announcements, the big three legacy carriers have stuck with the traditional way of awarding frequent flyer miles based on the number of miles traveled. Although it would seem like a longer flight would cost more and should come with more rewards miles, this price comparison is often not true.

Unlike many other industries where customers are charged by the unit, airline ticket prices are determined by complex formulas that only have distance flown as one of many factors. From the airline's perspective, the best gauge of the value of a purchase is ticket price, not miles flown.

In February, Delta Air Lines became the first of the big three legacy carriers to move to a miles per dollar spent setup. Now, Delta customers will earn between five and 11 SkyMiles per dollar spent, varying by member status level. United Continental has now joined Delta, and also offers between five and 11 MileagePlus miles by dollar spent, again, varying by status level.

In fact, both airlines have the same miles per dollar earned at their corresponding status levels, as seen in the table below.

Status Level

Miles Earned per Dollar Spent

Delta General Member

United Member

5

Delta Silver Medallion

United Premier Silver

7

Delta Gold Medallion

United Premier Gold

8

Delta Platinum Medallion

United Premier Platinum

9

Delta Diamond Medallion

United Premier 1K

11

Why change the program?As previously discussed, dollars spent is more accurate in terms of customer expenditure and airline costs than is the traditional miles flown metric. Under the old system, leisure and budget travelers could pick up a lot of miles on the cheap by finding the lowest fares on long distance flights, while high-paying travelers flying short distances would not earn the same rewards.

By changing the program, airlines are shifting their rewards programs to target the higher-paying travelers who make up a greatly disproportionate share of revenue. At the same time, airlines are encouraging customer loyalty even more by tying the number of miles earned per dollar spent directly to airline status level.

Policy spreadWhen Delta Air Lines announced the changes in February, it became the first to test the waters on customer reactions to such changes. Customers did not flee Delta, and now, United Continental has joined in using the same logic as Delta for the changes.

This is not the first time frequent-flyer-related policies have spread from Delta to United Continental. Delta was also the first to institute a minimum spending requirement for its lowest level status program, a move which was quickly copied by United Continental.

With the changes now taking hold at two of the three big legacy carriers, it would not be surprising to see American Airlines Group get on board in the future. Although the company is still working on the integration of US Airways and American Airlines, such a change could be rolled out as part of the integration of the airlines' rewards programs, or as a separate change after the integration is complete.

Frequent changes for frequent flyersTraditional frequent flyer programs have relied on a metric based on miles flown for determining rewards. However, as airlines seek to attract the biggest spenders and further reward customer loyalty, carriers are switching to a dollars spent measurement for reward miles earned.

By copying Delta's plan, United Continental has further assured Delta that the policy will not cost it too many customers, while at the same time, increasing the likelihood that American Airlines Group will take a similar approach, as well. While I don't know when, or if, American Airlines Group will make this decision, changes to frequent flyer programs are moving rapidly, making them something both investors and travelers should keep an eye on.

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Alexander MacLennan owns shares of AMERICAN AIRLINES GROUP INC and Delta Air Lines, and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC, long January 2015 $32 calls on AMERICAN AIRLINES GROUP INC, and long January 2015 $40 calls on AMERICAN AIRLINES GROUP INC. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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